Read the headlines — and your bank statement — and weep, but don’t say TAS didn’t warn you.
As I detailed here in February in “Dick Durbin Is Stealing Your Free Checking,” thanks to price controls on debit card transactions from the Durbin Amendment of the 2010 Dodd-Frank “financial reform” law, free checking is going the way of the dodo bird. The Durbin price controls on interchange fees — the so-called “swipe fees” that retailers pay to bank and credit unions that process debit card transactions, go into effect this Saturday, October 1, and are already showing more dire effects than originally predicted.
Not only is free checking disappearing at a rapid pace — a new Bankrate.com survey detailed in USA Today found that only 45% of non-interest bank checking accounts are free, down from 65% in 2010 and 76% two years ago, and that the average monthly fee for non-interest checking accounts is $4.37, up 75 percent from last year — but ordinary Americans will soon be hit by new monthly fees for using their debit cards. And new evidence shows that the price controls may be causing thousands of job losses as well.
On Thursday, Bank of America announced a new $5 monthly fee for debit card usage, citing the Dodd-Frank price caps that will force retailer interchange fees down from an average of 44 cents to 21 cents and cause banks to lose half their revenue from this service. Senate Majority Whip Dick Durbin (D-Ill.) blasted Bank of America and disclaimed any responsibility for his measure causing these new fees. “It’s overt, unfair and I hope their customers have the final say,” Durbin told the Hill.
But thanks to Durbin’s rule, BofA’s customer and other ordinary consumers may have nowhere to go. According to the Associated Press, regional banks are following suit: “SunTrust, a regional bank based in Atlanta, began charging a $5 debit card fee on its basic checking accounts this summer. Regions Financial, which is based in Birmingham, Ala., plans to start charging a $4 fee next month.”
And the Texas community bank International Bancshares dealt with the revenue loss from the price controls in another way. Last week, the firm announced it was closing 55 branches in grocery stores and shedding 500 jobs. And speaking of jobs, the Durbin Amendment was cited as a factor in BofA layoff of 30,000 of its workers by a Wall Street Journal editorial.
THE IRONY OF THESE DEVELOPMENTS is that if the media and politicians wanted to blame a greedy big business for these new consumer costs, there is one industry that would accurately fit the bill. This would be the giant big-box retailers that lobbied for these price controls to fatten their bottom line.
Durbin even invoked lobbying from the nation’s biggest pharmacy chain, Deerfield, Illinois-based Walgreens, when he introduced his amendment to Dodd-Frank in May 2010. Durbin said on the Senate floor that his measure came about after the company’s CEO called him to complain that the transaction fees Walgreens pays to process debit and credit cards were “the fourth largest item of cost for their business.”
Yet in this era of the “Buffett Rule” and bashing “millionaires and billionaires,” Durbin and other liberal proponents of these price controls never quite explained why Congress should be concerned with the routine costs of doing business for a retail chain such as Walgreens that makes $2 billion in annual profits. Or for that matter, other retail behemoths such as Wal-Mart, Home Depot, or Buffett’s Berkshire Hathaway, with retail units from Dairy Queen to Nebraska Furniture Mart, that will benefit from this regulation-driven corporate welfare.
In the Hill article, Durbin reiterated his strange belief that bank, but not retailer, profits were somehow illegitimate. “These hidden fees were designed to boost big-bank profits by charging small businesses and merchants every time a debit card was swiped,” Durbin exclaimed. “And profit they did.”
But what exactly is so wrong about making a profit by charging merchants for a service that improves their bottom lines. Under the current system, ending on Saturday, retailers pay a fee averaging 1.19 percent on each debit card purchase. In return they get more sales and the guaranteed payment for all purchases that was lacking in the “good old days” of bounced checks.
But Dodd-Frank does not even allow banks and credit unions to charge retailers a fee that covers their costs, let alone make a profit. The Durbin Amendment only allows interchange fees that are “reasonable and proportional to cost” and only “incremental costs” can be considered. Starting Saturday, the Federal Reserve’s price caps under this rule will prevent banks from charging more than a range of 21 cents to 25 cents per transaction, whether that purchase is for $1 or $10,000.
So it was always inevitable that much of these costs of processing debit cards — including the upkeep of sophisticated technology and combating fraud and identity theft — would be transferred from retailers to consumers. In setting the price controls, the Fed almost invited banks and credit unions to engage in this cost shifting, “helpfully” pointing out that “the interchange fee standard would not limit the ability of an issuer to earn revenue from other sources, such as charging fees to cardholders.”
But don’t worry, the retailers and their lobbyists proclaimed in support of this rule, we’ll pass on our billions in savings to our customers. But strangely, there are no “Durbin discounts” being advertised in sales brochures for this weekend. Politico reports that “the savings for consumers on the retail side continue to be mostly theoretical” and quoted the general counsel of the National Retail Federation as saying merely that “companies are exploring it.”
Don’t hold your breath waiting for retailers to pass on their windfall. A study by the U.S. Congress’s Government Accountability Office found that after Australia enacted interchange price controls for credit cards, there was “no conclusive evidence” that any of the Aussie retailers’ $1.1 billion in savings had been passed on to consumers
UNFORTUNATELY, THE RETAILERS’ CLOUT on the Hill, as well as their legitimate beefs with overregulation, swayed some normally conservative Republicans into backing merchants’ calls to put regulatory shackles on others. A bipartisan measure to delay the Durbin price controls in June would have gotten the 60 votes needed to clear the Senate — and would have been the first rollback of a provision of Dodd-Frank — were it not for 12 Republicans backing these price controls. There were some interesting patterns as Georgia GOP Sens. Saxby Chambliss and Johnny Isakson became sudden coverts to price controls after heavy lobbying from Atlanta-based Home Depot, a firm that American Banker as “on the warpath” against interchange fees . (For the full list of the members of what I call the GOP’s “Durbin Dozen” price control caucus who voted to keep the Durbin Amendment, click here.)
These GOP Senators need to catch the courage of their freshman colleague John Boozman (R-Ark.), who voted against the price controls despite lobbying from his state’s largest employer, Wal-Mart. They can also be inspired by freshman Rep. Francisco Canseco (R-Texas). At a recent conference on access to credit co-sponsored by the Competitive Enterprise Institute, Canseco related an incident in which he told a retailer lobbying him for interchange price controls that someone who charges $6 for a coffee drink that costs 99 cents has no business moaning about “illicit profits.”
It’s time to repeal the Durbin Amendment and many other onerous provisions of Dodd-Frank, including those that hurt retailers, such as the authority of the unaccountable Consumer Financial Protection Bureau over stores that extend credit and those that prevent retailers from creating affiliated banks called industrial lending companies (ILC)s. Lifting the ILC ban, as I have written, would allow the free market to bring down credit card processing costs without hurting consumers, and would add more banking system competition that would benefit everyone.
This Dodd-Frank repeal bill, similar to measures introduced by Rep. Michelle Bachmann (R-Minn.) and Sen. Jim DeMint (R-S.C.), should be called the “Free Checking — And Free Enterprise — Restoration Act.”
John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.